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ROBERT SIEGEL, host:

Democratic Senator Christopher Dodd of Connecticut has floated a different vision for financial regulatory reform. Senator Dodd is an influential voice in these matters. He's chairman of the Senate Banking Committee, and he joins us from Capitol Hill. Welcome to the program.

Senator CHRISTOPHER DODD (Democrat, Connecticut): Hi. Good to be with you.

(POST-BROADCAST CORRECTION: The Obama administration has not proposed eliminating the Office of Thrift Supervision and keeping the Office of the Controller of the Currency. The Obama administration is actually calling for a merger of the two federal bodies into one called the National Bank Supervisor.) SIEGEL: The Obama administration wants to eliminate the Office of Thrift Supervision, but create a new Consumer Financial Protection Agency. They would make the Fed the chief regulator of systemic risk, and keep the FDIC and the Office of the Controller of the Currency in Business. You've taken a very different approach, creating one big bank regulator. Why? Why is your idea better?

Sen. DODD: Well, first of all, it isn't necessarily big. But - and you have to know the history of this. We have a very convoluted system of bank regulators. It's an irrational system created by historical accident. One of the problems we have, why did we end up in this mess? Now, there are a lot of reasons but one major reason, of which there is consensus, is that you had what they call charter shopping going on.

One major financial institution - which I won't name - just the other day said, in the absence of your changing the rules, we will shop and we will find the regulator of least resistance because we don't believe that over-regulation is in our interests. I don't, either.

SIEGEL: But when you speak of what's bipartisan and what there's consensus about, it had been - at least - the conventional wisdom in Washington that there was not sufficient consensus on Capitol Hill to go to a single, streamlined regulator, and that you wouldn't have it. Do you find in the Senate that you have Republican and Democratic votes for this idea?

Sen. DODD: Well, I find it sort of an interesting debate. What people seem to be telling me is, I can't win because the regulators, the constituency there will oppose them being consolidated. The institutions want to continue shopping for regulators. And so, the answer is not that I'm wrong. But the answer is, I can't win.

Now, that's where we begin reforming the regulatory system. Not on the basis of what's right, what ought to be done to correct the mistakes that have given us this mess on our hands - then we're not going to get very far. I have a lot more confidence in my colleagues. If we end up drafting a bill that everyone likes, believe me, we have failed.

SIEGEL: The Federal Reserve - has the Obama administration, are they too enthralled with the idea of the Fed as the regulator of the financial sector?

Sen. DODD: Well, I wouldn't attribute motivations to it. Here's my concern about that. The Federal Reserve's primary function is in monetary policy. The Central Bank here is the most important central bank in the world and therefore, they need to be actually focused on their primary function and job. And my concern is that you start loading up the Federal Reserve with additional responsibilities, including in the regulatory process of financial institutions, you begin to denigrate the principal responsibility they have.

I'm worried that we're going to lose the independence of the Fed; you'll end up having more and more demands as the responsibilities increase of congressional oversight and intrusion into the Fed's activities. Now, I know that can be appealing to some, but I think it's dangerous. We end up turning the Fed into basically another regulatory body, then I think you lose the very critical importance of the Fed - and that is a strong financial monetary policy regulator that it ought to be.

SIEGEL: There's an idea out there, which I want you to comment on, which people describe as the plain vanilla requirement. It is that if I'm going to look for a mortgage at the bank, the lender should be required to at least show me and to offer me the straight-ahead - say, 30-year fixed rate mortgage before rushing straight to the more exotic products. Is that a fair regulation? I know the banks think it's an undue constraint, but does any borrower think that's an undue constraint on the banks?

Sen. DODD: I'm more inclined to sort of agree with the banks on that one. And over the years, I have authored provisions that would require, for instance, a credit-card company tell you what the cost to that consumer would be if they owed $1,000 at a certain rate and only paid the minimum balance, what would you ultimately owe?

So I don't mind having examples of what can happen. But the idea that we're going to promote one financial product over another, be it vanilla or otherwise, makes me a little uneasy. I don't - you know, what that - the fact that some thing is not quite vanilla doesn't mean it's any less good a product in the end.

SIEGEL: But as I understand it, the requirement isn't saying you can't offer people no-principal, flexible-rate mortgages. It's saying among what you offer, you've got to show them the straight-ahead, three-yards-in-a-cloud-of-dust mortgage, the old-fashioned mortgages.

Sen. DODD: Yeah.

SIEGEL: I mean, I understand why a bank might say, that crimps my style. But isn't it a fair protection for a borrower to say you're allowed to see the most basic product they offer?

Sen. DODD: I think we're spending too much time debating that point. I'm not -I don't think it quite does everything its advocates claim. I don't think it's quite as pernicious as the opponents claim. I just don't think it ought to be the major point.

SIEGEL: Let me ask you about yourself and this issue. You're up for re-election in Connecticut? You've long been a good friend to the financial services sector. You've raised six billion bucks, by my count, from people who work in banking, financial services, insurance. Does that right now - should it lead people to say Senator Dodd takes money from bankers, he's writing regulations that bankers want?

Sen. DODD: Well, if I thought there was another way, as someone who has supported public financing of campaigns for almost 40 years - believe me, I wish there was some other way to finance a campaign. I'm looking at potential opponents who are going to sell fund to millions of dollars. They can write their own checks, I can't do that. And so, I'm stuck with the system we have. I don't like it. I wish it were otherwise. I don't believe in unilateral disarmament, for either my country or for me. I've got to respond to these things.

SIEGEL: You mean, in terms of raising money for your campaign, you don't believe -

Sen. DODD: Yeah, and - but I've never taken a nickel in contributions on the basis of a commitment to be for or against something. Never have, never will. And over the years, I've tried to be balanced in my approach. I don't consider myself anti either financial institutions or necessarily their best friend. That's not my job. My job down here is to do the best job I can, primarily on behalf of the people who are the ones who walk through the doors of financial institutions.

SIEGEL: Senator Christopher Dodd of Connecticut, thank you very much.

Sen. DODD: Thank you very much.

SIEGEL: Senator Dodd is the chairman of the Senate Banking Committee.

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